Chapter 13: Latin America: Argentina, Brazil and Mexico

There are 26 countries in Latin America.  These countries account for 1/2 of the land area of North and South America.  Most of these countries share similar characteristics.  These characteristics include:

The structure of Latin American economies is very much a bi-product of the colonial powers and the economic theory of Mercantilism.  The goal of Mercantilism is to increase wealth by getting more gold or silver.  This was accomplished by seeking out new sources of gold in new territories and developing new markets for the home country's products.  International trade was heavily regulated by the European countries.  Rights to develop specific markets were allocated to trading companies.  One example is the British East India Company.

Spain was a prime example of a country driven by the desire to accumulate gold.  Spain sent explorers out seeking gold and new markets.  The gold was used to fund armies and these armies were used to acquire more territories.  Viceroys, sent by Spain, ruled the new territory.  These positions of power were obtained by making contributions to the King.  Viceroys were then free to fully exploit the new territory.

Spain's impact in the colonies was much greater than either England or Holland.  Spain left a language and a religion (soldiers conquered and Jesuits converted).  There was a greater level of racial miscegenation in the Spanish colonies where intermarriage between Spaniards and native Indians created a new social class - matzos.

The US and Canada were also products of mercantilism.

When the 20th century began, the 5 most important countries in North and South America were Canada, USA, Mexico, Brazil, and Argentina.  The former British colonies had a great deal of immigration from Europe, the former Spanish colonies did not.

Table 13-1 provides a comparison of per capita GDP for the US, Canada, Argentina, Brazil and Mexico measured in 1990 $'s. At the beginning of this time period Canada was still a part of the British empire.   In 1900, Canada and Argentina were approximately the same size.  Mexico's per capita GDP was greater than Brazil and the US had a higher per capita income than the others.

Canada and Argentina remained similar in size until 1940.  Then Canada began to pull away.  By 1994, Canada has more than twice the per capita income of Argentina.

The Economy of Latin America

Problems of the 1980's cancelled out much of the gains made in Latin America in the 1960's and 1970's.  In the 1970's, commodity prices were high (this included coffee and oil).  Brazil, Mexico and other Latin American countries borrowed in foreign markets to fund economic development.  They borrowed against future revenue from the sale of these high priced commodities.

In the 1980's the world commodity markets collapsed.  The Latin American countries had difficulty making payments on their foreign debt.  Economic growth stopped, the economies shrank.  This made it even more difficult to make the payments.  There was growing unemployment and social unrest.  Other characteristics of the 1980's included:

Inflation - this was not a small problem.  Argentina experienced inflation running at a rate of 1000 percent per year.  The economy collapsed. This created political instability and uncertainty.  Much of the wealth in the country was exported to more stable economies.

Foreign trade - foreign trade was commodity driven and subject to extreme fluctuations in world prices for these commodities.  There was little diversity in exports.  Trade often was single commodity dependent.

Population - while the growth in the population was high, it was declining.  However, the economies had to grow at a rate sufficient to create new jobs for this population.  Infrastructure in the cities was not sufficient to support large populations.  For large areas there was no water or sewage provided.  There was limited education and health care available.  This put increasing pressure on the state and national governments to make social welfare expenditures.

Foreign debt - the total Latin American debt to foreign banks rose from $115 billion in 1978 to $280 billion in 1984.  In August of 1982, Mexico declared a foreign debt crisis.  In November, Brazil followed suit.  Costa Rica declared a moratorium on its debt payment.  In 1986, Brazil's foreign debt was equal to 1/3 its GNP and was 3 times its exports.  This is significant because exports earn revenue to fund foreign payments.  Mexico's foreign debt was greater than its GNP.  When governments facing rising foreign debt, they must reduce spending within the economy to meet interest payments.  Mexico's government behind in payments of just interest on the debt by $100 million in 1980.  By 1987 this had risen to $8.1 billion and in 1989, $10.6 billion.  Several international plans were developed to help Latin American debt problems.  The Baker Plan of 1985 involved the use of IMF loans to foster economic growth.  The IMF increased its credit from $3 billion in 1982 to $18.2 billion in 1987.  However, a country which received funds from the IMF was required to make structural changes in their economies.  Argentina was required to change its entire monetary system.

Political Instability - income inequality, poverty and corruption create an excellent prescription for political instability.  Almost every country in Latin America has been involved in multiple revolutions.  Venezuela had two military coups in 1992 and 1993.  The latest unrest has paralyzed the economy.  President Chavez is attempting to nationalize the oil industry.  There were tremendous protests against some of his proposed policies.  The flow of oil from Venezuela was dramatically reduced earlier this year.  Across Latin America there is extreme inequities in income distribution.

Income Inequality - As the information presented in Table 13-2 indicates, income inequality is greater in Latin America than in other areas of the world.  Incomes received by the top 10% are 50 times greater than the income received by the bottom 10%.  This compares to the US (19 times greater) and Sweden (5.5 times greater).  The Gini coefficient for Brazil is 60.1 versus Sweden's 25.

Why is extreme income inequality a problem?

Poverty - There is less poverty in Latin America than in Southeast Asia or Africa.  However, poverty has increased as populations have moved t urban areas.  This has created slums.  Table 13-3 presents country specific information about poverty levels.

Corruption - History has shown that corruption is endemic in Latin America.  It dates back to the conquistadores.  In the 1990's the presidents of Brazil, Ecuador, and Venezuela resigned following charges of corruption.  Election to office in Latin America was often meant the ability to amass a small fortune while in office.  Table 13-4 presents a corruption index for countries around the world.  Denmark is ranked #1 (least corrupt).  The US is ranked #17.  The majority of Latin American countries are ranked in the bottom half or bottom third of the list.

Militarism - What does Latin America produce?  Generals and more generals.  The military has dominated Latin American political life for 200 years.  Often democracy has proved to be no better than military rule.  Three hundred years of Spanish and Portuguese rule did little to equip Latin America for democratic rule.

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Argentina

Located in a temperate climate, colonized by immigrants from Europe, and the 8th largest country in the world, Argentina's 1997 population was 36 million people.  Argentina is primarily agrarian.  Agricultural products account for most important components of exports.

Argentina began 1900's with the highest per capita GDP of all Latin American countries.   In 1913, Argentina was the 2nd largest beef and grain exporting nation in the world.  By 1930, the economy was twice that of Japan and 3 times that of the Soviet Union.  As Table 13-5 indicates, in 1997, Argentina was ranked #19 out of 123 countries in real GDP.  The country experienced a negative growth rate in the 1980's (-0.3%) but a positive growth rate of 4.5% in the 1990's.  Argentina ranks high on the Human Development Index, the literacy rate is high.  It remains, as does much of Latin America, a male-dominated society.

The major factor contributing to the below-average performance in the Argentine economy is political instability.  A succession of generals ruled from 1932 - 1982. In 1930, President Irigoyen was overthrown by the military.  In the 1930's and 1940's the military controlled elections.  Between 1945 and 1955, Juan Peron and Evita Peron almost destroyed the economy.  Peron nationalized foreign industries, diverted resources from agriculture into other areas, and used one class against another to suppress opposition.  Peron was thrown out in 1955, returned in 1973, died in office and his 2nd wife succeeded him.  Generals continued to rule from 1976 - 1982.  To divert attention from the troubled economy, the Falkland Islands were invaded and claimed for Argentina.  Great Britain's swift reprisal and Argentina's loss in the war resulted in the general's loss of power in the government.

Argentina's 1980 per capita Real GDP was $8,245.  In 1990 it was $6,581.  The average annual growth rate was -2.2%!  There was economic stagnation, inflation as evidenced by an exchange rate change from 2.6 astrals =$1 in 1982 to 8,753 astrals = $1 in 1988, and a rising foreign debt (in 1988 foreign debt was 88% of GNP).  In 1989, Carlos Menem was elected President.

In 1990's the astral was replaced by the peso and the peso was pegged to the US dollar at a rate of 1 peso = $1.  Menem was committed to a program of economic stability, privatization, encouragement of FDI and reduced tariffs.  Argentina with Brazil, Paraguay and Uruguay formed the MERCOSUR (a customs unions designed to lower barriers to trade between these countries).  Between 1991 and 1994, 90% of the state-owned enterprises were privatized.  FDI increased.

Argentina experienced an economic crisis in the latter part of the 1990's.  Brazil's economy declined by 0.2%.  Because thirty-five percent of Argentina's exports were to Brazil, this had a dramatic impact on Argentina.  In early 1999, President Menem proposed replacing the peso with the US dollar.

Update

When Argentina linked the peso the US dollar, the country adopted a currency whose exchange rate bore little relation to its own economic conditions.  Argentina had ceded control of its monetary policy to the US.  The Asian currency collapse in the latter part of the 1990's depressed world commodity markets and investor confidence.  There was a decreased demand for investment in any developing country, not just southeast Asia.  In Latin America there was a decreased demand Latin American exports and investments.  This resulted in a decreased demand for Latin America currency and put pressure on the exchange rates of these currencies with the US dollar and other currencies to fall.  Brazil devalued its currency the real. 

Argentina, with its currency pegged to the dollar, did not.  The end result was that Argentina's products became relatively more expensive than Brazil's.  There was a further decreased demand for Argentine exports or investments.  This reduced the amount of foreign reserves Argentina had to make foreign debt payments.  Unemployment rose.  Eventually the new Argentine president unpegged the peso.  The value of the peso dropped dramatically.  Unfortunately, many contracts in Argentina had been written due payable in dollars.  This meant that the debt owned by the borrowers dramatically increased.  There were runs on the banks.  There was a national "bank holiday" (the banks shut their doors).  Former President Menem is one of the candidates in the most recent Argentine election.

Brazil

Brazil is the largest country in Latin America in terms of land area and population.  It is 3 times as big as Argentina (slightly smaller than the US).  In 1997 Brazil's real GDP was $1.02 trillion (purchasing power parity) which put it at #9 in the world.  It has a rich natural resource endowment but continued problems with extreme income inequality, difficulty in building democratic institutions and hasn't lived up to its economic potential.

History

Brazil was a Portuguese possession.  It was colonized by slaves and Portuguese Jews (who were run out of Portugal).  For most of the 19th century Brazil had a king.  In the mid-1880s it achieved independence from Portugal.  Brazil fought wars with Argentina, Paraguay and Uruguay in the 19th century, abolished slavery and became the world's leading exporter of coffee.  In 1820, Brazil's per capita real GDP was $670.  By 1900 it was $704.  Brazil's history in the 20th century is similar to other Latin American countries, it is dominated by the military.  General Getulio Vagas was dictator for 19 years.  Brazil reoriented from an export driven agricultural economy to a policy of import substitution to build domestic industry.  Between 1965-1980, Brazil was one of the fastest growing economies in the world with an average growth of 9.4%.  In the 1970's there was huge international borrowing against Brazil's commodity earnings.  The oil embargo in 1973 doubled the price of oil in Argentina.  Brazilian foreign debt increased from $12.5 billion in 1973 to $92 billion in 1980.  The economy suffered severe economic problems in the 1980's.

In the 1990's the government of Brazil began a program of privatization of banks and state-owned enterprises, opened the economy to foreign trade and investment.  The economy was hit hard by the currency crisis in Mexico, East Asia and then Russia.  Investors lost confidence in developing markets.  In the latter part of the 1990's the Brazilian economy suffered soaring unemployment, rising foreign debt (more than $250 billion in August 2002) and growing discontent with the government.  The most recent election has brought left-wing socialist candidate Luiz Inacio Lula a Silva to power.  There are some fears that market reforms and privatization will be reversed.

Mexico

Mexico is linked to the US through NAFTA.  Mexico pursued the same import substitution policy as the rest of Latin America.  The result was higher prices for the Mexican consumer.  Mexico relied heavily on oil as a source of foreign earnings.  The oil glut of the 1980's had a dramatic impact on the Mexican economy.

Mexico in the 1990's

Carlos Salinas de Gortari was elected and continued a process of privatization.  His government relaxed the laws prohibiting or restraining foreign direct investment.  In December of 1994, Mexico experienced an exchange rate crisis.  Mexico had a huge trade deficit in goods and services.  This was putting pressure on the currency to be devalued.  An uprising in Chiapas upset investor confidence in Mexico.  This meant that investors were less confident about earnings on investments in Mexico and many began to withdraw their investment.  The government was unable to maintain the "pegged" value of the peso to the $1 and eventually was forced to let the value of the peso float.  The end result was that the peso lost value to the dollar.  The value of investments in Mexico declined significantly.  Investors continued to lose confidence.  The Mexican economy need something to reestablish investor confidence.  President Clinton's administration provided a $40 billion assistance package.  In 1994, Ernesto Zedillo replaced Carlos Salinas as president.  In general Mexico's economy performed well in the 1990's.  You still see an enormous disparity between the rich and poor.  Forty percent of Mexico's population lives on less than $2 per day.  Social classes are based on color.

Update:

Vincente Fox, a former Coca-Cola executive, was elected President of Mexico.  This was the first time that his party, National Action Party had ousted the Institutional Revolution Party (PRI). The PRI had been in power for 71 years.  Mexico